Marginal costing

Decision Making: Scarce Resources (Limiting Factor)

Scenario: one input is in short supply and becomes the limiting factor (e.g. materials, labour hours, machine hours, storage space)

8-step process:

1. Identify the scarce resource
2. Calculate contribution per unit for each product
3. Calculate units of scarce resource required per unit of each product
4. Calculate contribution per unit of scarce resource = Contribution ÷ resource units per product
5. Rank products from highest to lowest contribution per unit of scarce resource
6. Allocate the scarce resource to the highest-ranked product first (up to maximum demand), then next, etc.
7. Calculate total contribution from the production plan
8. Deduct fixed costs → maximum profit

Example — Kelly Ltd (scarce resource: aluminium, per sq.m)

Max total contribution = £92,400 → Max profit = £48,980

If unable to meet full demand for lower-ranked products:

• Buy in the shortfall (compare contribution after deducting buy-in cost)
• Source the scarce resource from an alternative supplier at higher cost

Limitations of not producing all of one product: lost customers to competitors, reduced market share, complementary product effects